Todd Sherer and Christopher Gaughan, both vets of Dalton Investments, are now at the helm of their own firm: Illumination Asset Management.

The Los Angeles-based IAM's first fund, the Credit Opportunities Fund, will focus on residential mortgage-backed securities without U.S. government backing, a market worth an estimated $1 trillion. The vehicle launched this month with $205 million and continues strategies Sherer, IAM managing principal and CIO, ran at Dalton.

Gaughan told FINalternatives he, Sherer and a team of six Countrywide and Dalton vets were motivated to launch the fund at this time because they see “an emerging set of opportunities that are well suited to our core expertise, and because we had the opportunity to create a firm with both an exceptional team and reliable investor support.”

Gaughan said their investment process and primary focus remain unchanged:

“We continue to focus on distressed RMBS and related opportunities, with a high concentration of Non-Agency exposures, in an effort to extract value from what we believe to be structural market inefficiencies. That said, we’ve invested in additional resources in the form of key personnel and technology that we think will expand and improve our capabilities, and allow us to pursue a broader range of opportunities going forward.”

The fund will also invest in government-backed mortgages, commercial mortgage-backed securities, collateralized debt obligations and other forms of structured credit.

Gaughan, prior to Dalton, was the founder and CEO of Condesa Financial Holdings, an investment partnership focused on mortgage related investments in Mexico. Before that, he was co-founder and president of the global macro hedge fund Big Sky Capital.

Sherer was a senior vice president at Countrywide from 2002 to 2008, managing the credit-sensitive trading desk and responsible for trading whole loans and structured products. Prior to that, he was a vice president at Nomura Securities International.

Wei Wang, Brian Stack and Jim Griffin are IAM managing directors. All three are responsible for research, with Wang also in charge of risk management and Stack and Griffin overseeing trading.

The strategy, according to a fund presentation, has produced a net average annual return of 45.08% since 2008. So far in 2012, it is up 5.91%.

Minimum investment is $1 million and the fund carries a one-year soft lockup with a 5% early-withdrawal penalty. Capacity is $500 to $1 billion.

The prime broker is JPMorgan, the auditor is PricewaterhouseCoopers and Butterfield Fulcrum is the administrator.

From the current issue of

The ratio calendar combination spread couples two ratio calendar spreads, one using calls and the other using puts. The call strike prices are higher than the put strike prices. This strategy is complex and profit is limited, but if a high amount of time value is involved in the short positions, that profit can be substantial and risk is still limited.